Australia trade deficit widens on falling exports, worse to come

SYDNEY (Reuters): Australia’s trade deficit widened more than expected in July, largely due to declining gold and iron ore exports, and the recent plunge in prices for the steel-making ingredient is likely to take a bigger chunk out of earnings from August onwards.

Government figures out Friday showed a deficit on goods and services of A$556 million ($571 million) in July, compared to forecasts of a A$300 million shortfall and a deficit of A$227 million in June.

“The broad picture emerging from the Asia-Pacific trade data for July suggests that external demand started Q3 on the back foot,” said Michael Turner, a strategist at RBC Capital Markets.

“The weakness in spot iron ore prices is testament to this and our forecasts involve external demand detracting from growth in the second half.”

While prices for iron ore, Australia’s single biggest export, began to slide in July, an increase in volumes shipped helped limit the damage. Indeed, despite all the concerns of a slowdown in Chinese demand, exports of iron ore to the Asian giant actually rose in the month.

However, prices for the steel-making mineral have continued to tumble, falling by over a third to touch $86.70 a ton, lows last visited in late 2009.

Since iron ore exports had been running at over A$60 billion a year, such a fall if sustained would threaten to cut earnings by perhaps A$20 billion. That in turn could crimp mining profits, dividends, wages and government tax receipts.

While the Reserve Bank of Australia (RBA) left rates steady at 3.5% at its policy meeting this week, it highlighted the plunge in prices and admitted to uncertainty on the outlook for China, Australia’s biggest customer.

The sober tone stoked speculation that rates could be cut as soon as October, following easings in May and June. Interbank futures put a 50-50 probability on a move in October and are fully priced for 3.0% by Christmas.

Overnight indexed swaps, which show where the market thinks the cash rate will be over time, put rates at 2.90% in 12 months. Yields on Australian 10-year bonds are at 3.13%, so it is cheaper for the government to borrow for a decade than for banks to borrow overnight.

Prices for coal, Australia’s second biggest earner, have also been under pressure amid slowing economies across Asia.

As a result some miners have been rowing back on their most ambitious expansion plans. Iron ore miner Fortescue Metals Group this week cut spending plans by a quarter and watched helplessly while its share price sank to a three-year trough.

Also not helping is the relative strength of the Australian dollar. Not only does that make manufactured exports less competitive but it reduces the return from commodities which are mainly priced in U.S. dollars.

Still, the damage was limited in July with Australia’s exports of goods and services dipping 2.7% to A$25.76 billion.

Much of the drop was due to a A$420 million fall in non-monetary gold, a particularly volatile export. Gold has actually been rising in price this month and analysts suspected exports would rebound in August.

On the other side of the trade accounts, imports eased by 1.5% to A$26.3 billion. That was mainly due to a pullback in capital goods which have been particularly strong as miners buy heavy equipment for major projects.

Miners are still betting heavily that demand from the urbanising billions in China and India will grow for decades to come, and are pouring massive amounts of money into mines and liquefied natural gas.